CHECKMATE PHARMACEUTICALS, INC. The following discussion should be read in conjunction with our consolidated financial statements and accompanying footnotes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. See "Special Note Regarding Forward-Looking Statements." Because of many factors, including those factors set forth in Part I, Item 1A "Risk Factors" in this Annual Report on Form 10-K, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Overview
We are a clinical-stage biotechnology company focused on developing and
commercializing our proprietary technology to harness the power of the immune
system to combat cancer. Our product candidate, vidutolimod (formerly
CMP-001),
is a differentiated Toll-like receptor 9 ("TLR9"), agonist delivered as a
noninfectious biologic virus-like particle ("VLP"), utilizing a
CpG-A
oligonucleotide as a key component. When injected into a tumor, vidutolimod is
designed to trigger the body's innate immune system, thereby altering the tumor
microenvironment and directing activated anti-tumor T cells to attack both the
injected tumor and also tumors throughout the body. In a clinical trial of
vidutolimod in combination with a systemic checkpoint inhibitor ("CPI"), in
patients whose tumors were unresponsive or no longer responsive to a CPI, we
have observed a best objective response rate ("ORR"), of 28% (27/98), including
post-progression responders. We are evaluating vidutolimod across multiple tumor
types in combination with other immunotherapy agents. Our founder, Art Krieg ,
first reported the discovery of immunostimulatory cytosine-phosphate-guanine
("CpG"), DNA in 1995, which, combined with the discovery of TLR9, led to the
recognition that synthetic
CpG-A
oligonucleotides have
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the potential to stimulate the TLR9 receptor for therapeutic purposes. Our goal is to establish vidutolimod as a foundational immuno-oncology therapy that engages the innate immune system to fight cancer and improve outcomes for patients with a broad range of solid tumors.
Since our inception, we have devoted substantially all of our efforts and financial resources to the research and development activities related to our technology and our vidutolimod program, and the administrative support for such activities including raising capital, business planning, undertaking
pre-clinical
studies and clinical trials and other support activities. We do not have any products approved for sale and have not generated any revenue from product sales or any other sources and do not expect to generate any revenue for the next several years. We have not yet successfully completed any registrational clinical trials, obtained any regulatory approvals, manufactured a commercial-scale drug, or conducted sales and marketing activities.
We have funded our operations to date primarily with proceeds from the sale of
preferred stock, convertible debt and common stock. Since inception, we have
received net cash proceeds of
We have incurred recurring losses and had negative operating cash flows since
inception and our ability to generate product revenue sufficient to achieve
profitability will depend heavily on the successful development and eventual
commercialization of vidutolimod or any other products we acquire or develop.
Our net losses were
We expect our expenses and capital requirements will increase substantially in connection with our ongoing activities, particularly as we:
• conduct our current and any additional clinical trials of vidutolimod,
including, among others, our current Phase 2 trial in
anti-PD-1
refractory melanoma, our current randomized Phase 2/3 trial in
first-line melanoma, our current Phase 2 proof of concept trial in head
and neck squamous cell carcinoma, and our current Phase 2 proof of
concept trial with patient cohorts in
anti-PD-1
naïve and
anti-PD-1
refractory CSCC and MCC;
• conduct the necessary
scale-up
activities to support the potential commercialization of vidutolimod,
if approved;
• conduct research and preclinical development of any future product candiates
• hire additional clinical and scientific personnel to support our
ongoing preclinical activities and clinical trials of vidutolimod and
any other product candidates we choose to develop;
• seek marketing approval for vidutolimod and any other product
candidates that successfully complete clinical development;
• acquire or
in-license
additional product candidates;
• maintain compliance with applicable regulatory requirements;
• maintain, expand, protect and enforce our intellectual property portfolio;
• develop and expand our sales, marketing and distribution capabilities
for vidutolimod and any other product candidates for which we obtain
marketing approval;
• expand our operational, financial and management systems and increase
administrative personnel, including to support our clinical development
and commercialization efforts and our operations as a public company;
• encounter continued delays or interruptions related to current
development activities, our supply chain, or the third-parties on whom
we rely due to the ongoing
COVID-19
pandemic and otherwise; and
• expand our infrastructure and facilities to accommodate the planned
growth of our employee base;
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As a result, we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing and distribution or licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or arrangements when needed on favorable terms, or at all. If we fail to raise capital or enter into such agreements as, and when, needed, we may have to significantly delay, scale back or discontinue the development and commercialization of vidutolimod or any of our future product candidates.
Since our inception in 2015, through venture funding and our IPO inAugust 2020 , we have raised$241.7 million . Our private rounds included prominent biotechnology institutional investors including Sofinnova Investments, venBio Partners, F-Prime Capital,Decheng Capital ,Longitude Capital ,Novo Holdings , Medixci, Omega Funds,Clough Capital Partners , Sectoral Asset Management, andBrightEdge , the venture investment fund of theAmerican Cancer Society .
Risks and Uncertainties
We are subject to risks and uncertainties common to early-stage companies in the biotechnology industry, including, but not limited to, the outcome of clinical trials, development by competitors of new therapeutics and technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, ability to secure additional capital to fund operations, and risks associated with the ongoing COVID-19 global pandemic or future pandemics, including known and potential additional delays associated with our ability to enroll our ongoing trials. There can be no assurance that we will be able to successfully raise sufficient additional capital or complete in a timely manner the development of, or receive regulatory approval for, any products developed, and if approved, that any products will be commercially viable. Any products resulting from our current research and development efforts will require significant additional research and development, including extensive preclinical and clinical testing and regulatory approval prior to commercialization. These efforts will require significant amounts of additional capital, adequate personnel, infrastructure and extensive compliance reporting capabilities. We have not generated any revenues from the sale of any products to date. Even if our product development efforts are successful, it is uncertain when, if ever, we will realize significant revenue from product sales.
We need to obtain significant additional funding and may seek additional funding through private or public equity financings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing agreements. If we are unable to obtain additional funding, we may be forced to delay, reduce or eliminate some or all of our research and development programs, which could adversely affect our business prospects, or we may be unable to continue operations. There is no assurance that we will be successful in obtaining sufficient funding on terms acceptable to the Company to fund continuing operations, if at all.
We believe that our existing cash, cash equivalents and
available-for-sale
investments of
Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when or if we will be able to achieve or maintain profitability. Even if we are able to generate product sales, we may not become profitable. If we fail to become profitable or are unable to sustain profitability on a continuing basis, then we may be unable to continue our operations at planned levels and be forced to reduce or terminate our operations. To the extent that
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we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common stockholder.
Inflation generally affects us by increasing our cost of labor and clinical
trial costs. We do not believe that inflation had a material effect on our
results of operations during the year ended
COVID-19
InMarch 2020 theWorld Health Organization declared the global novel coronavirus disease 2019 ("COVID-19") a pandemic. Despite progress with distribution and administration of vaccines, COVID-19 and its effects continue to evolve, particularly in light of emerging variants, such as Delta and Omicron. Although we have experienced some impact of the ongoing COVID-19 pandemic on our business and operations, including delays in initiation of study sites and enrolling patients, we cannot currently predict the scope and severity of any potential business shutdowns or disruptions or the resulting impact on clinical trials as the pandemic evolves. Our clinical trials that commenced during the COVID-19 pandemic have been and continue to be adversely affected by the COVID-19 pandemic, resulting in patient enrollment delays. As a result, inDecember 2021 , we revised our expectations with respect to the anticipated timing of clinical data milestones in our Phase 2 clinical trial in anti-PD-1 refractory melanoma patients, our Phase 2/3 trial in first-line melanoma and our Phase 2 clinical trial in head and neck cancer. We are continuing to monitor the latest developments regarding the COVID-19 pandemic, including the emergence of new and potentially more contagious strains of the virus, and the resulting impact on our ability to enroll our clinical trials. The financial impact of the COVID-19 pandemic cannot be reasonably estimated at this time and this pandemicmay continue to have a material adverse impact on our business, financial condition and results of operations.
Components of Our Results of Operations
Revenue
To date, we have not generated any revenue from any sources and do not expect to generate any revenue from the sale of products for the next several years. If our development efforts for vidutolimod or any future product candidates are successful and result in regulatory approval, we may generate revenue in the future from product sales. However, we cannot predict whether, when, or to what extent we will generate revenue from the commercialization and sale of vidutolimod or any future product candidates as we may never succeed in obtaining regulatory approval for any of our product candidates. If we enter into license or collaboration agreements for any of our product candidates or intellectual property, we may generate revenue in the future from payments as a result of such license or collaboration agreements, however there can be no assurance that we will be able to enter into any license or collaboration agreements.
Operating Expenses
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research activities and the development of our VLP technology and our vidutolimod program and include:
• expenses incurred in connection with the preclinical and clinical
development of our technology and vidutolimod, including clinical trials
under agreements with contract research organizations ("CROs"), clinical
investigators and consultants;
• employee-related expenses, including salaries, benefits and travel and
stock-based compensation expense, for employees engaged in research and
development functions;
• the cost of contract manufacturing organizations ("CMOs"), that
manufacture drug product for use in our preclinical studies and clinical
trials and perform analytical testing,
scale-up
and other services in connection with our development activities;
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• costs related to compliance with regulatory requirements;
• payments made under third-party licensing agreements, such as the
exclusive license agreement we entered into in 2015 with Cytos
Biotechnology LTD (now Kuros Biosciences AG, or "Kuros") (the "Kuros
License Agreement");
• facilities and other expenses, which include direct and allocated
expenses for facilities, insurance and supplies; and
• costs related to compliance with regulatory requirements.
We recognize external development costs based on an evaluation of the progress to completion of specific tasks using information provided to us by our service providers. This process involves reviewing open contracts, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of actual costs. Any nonrefundable advance payments that we make for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses. Such amounts are expensed as the related goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.
Upfront payments under license agreements are expensed upon receipt of the license, and any annual maintenance fees under license agreements are expensed in the period in which they are incurred. Milestone payments under license agreements are accrued and a corresponding expense is recognized in the period in which the milestone is determined to be probable of achievement and the related amount is reasonably estimable.
We do not track our research and development expenses by indication. Our direct external research and development expenses consist primarily of external costs, such as fees paid to CROs, CMOs, research/testing laboratories and outside consultants in connection with our preclinical development, process development, manufacturing and clinical development activities. Our direct research and development expenses also include fees incurred under licensing agreements. We do not allocate these costs to specific indications because they are deployed across the entire the vidutolimod development program and, as such, are not separately classified. We use internal resources primarily to manage our preclinical development, outsourced clinical trials, process development, manufacturing and clinical development activities. These employees work across the entire the vidutolimod development program and, therefore, we do not track their costs by indication.
Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. As a result, we expect that our research and development expenses will continue to increase substantially over the next several years as we advance vidutolimod into later stages of clinical development toward potential regulatory approval, advance vidutolimod for additional indications, as well as conduct translational research efforts and other preclinical and clinical development, including submitting regulatory filings for any other product candidates we may acquire or develop. In addition to the expected increase in third-party costs, we expect our personnel costs, including costs associated with stock-based compensation, will also increase substantially in the future. In addition, as we advance vidutolimod into potentially registrational clinical trials and, subject to positive data and regulatory approvals, potentially commercialize vidutolimod, we expect to incur additional expenses from milestone and royalty payments related to the Kuros License Agreement.
We do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization of vidutolimod or any other product candidates we may acquire or develop. This is due to numerous factors, some of which are beyond our control, that are associated with the successful
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development and commercialization of vidutolimod and any other product candidates we may acquire or develop, including the following:
• the scope, progress, outcome and costs of our preclinical studies and
clinical trials for vidutolimod or any other product candidates we may
acquire or develop;
• making arrangements with third-party manufacturers for both clinical and
commercial supplies of vidutolimod or any other product candidates;
• successful patient enrollment in, and the initiation and completion of
clinical trials in a timely manner;
• raising additional funds necessary to complete clinical development and
the potential commercialization, of vidutolimod or any other product
candidates;
• receipt, timing and related terms of marketing approvals from applicable
regulatory authorities;
• the extent of any required post-marketing approval commitments to
applicable regulatory authorities;
• developing and implementing marketing and reimbursement strategies;
• establishing sales, marketing and distribution capabilities and launching
commercial sales of vidutolimod or any other products, if approved,
whether alone or in collaboration with others;
• acceptance of vidutolimod or any other products, if approved, by
patients, the medical community and third-party payors;
• effectively competing with other therapies and/or changes in standard of
care;
• obtaining and maintaining third-party coverage and adequate reimbursement;
• obtaining and maintaining patent, trade secret and other intellectual
property protection and regulatory exclusivity for our product
candidates;
• protecting and enforcing our rights in our intellectual property portfolio;
• significant and changing government regulations; and
• maintaining an acceptable tolerability profile of the products following
approval, if any.
A change in the outcome of any of these variables with respect to the development of vidutolimod or any future product candidates would significantly change the costs and timing associated with the development of that product candidate. We may never succeed in obtaining regulatory approval for any product candidate.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and benefits, stock-based compensation and travel expense for personnel in executive, business development, finance, human resources, legal and support functions. General and administrative expenses also include direct and allocated facility-related costs as well as insurance costs and professional fees for legal, patent, consulting, accounting and audit services, investor and public relations services and outsourced information technology services.
We anticipate that our general and administrative expenses will continue to increase in the future as we increase our headcount to support the continued advancement of vidutolimod toward potential commercialization and the future development of any other product candidates that we may pursue. We also anticipate that we will continue to experience an increase in accounting, audit, legal, regulatory, compliance and director and officer insurance costs as well as investor and public relations expenses associated with operating as a public company. Additionally, if we believe a regulatory approval of vidutolimod or any other product candidate appears likely, we anticipate an increase in payroll and other employee-related expenses as a result of our preparation for commercial operations to market and sell that product candidate.
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Interest Income
Interest income consists of interest earned on our cash, cash equivalent and available-for-sale investments balances. We expect that our interest income will fluctuate based on prevailing interest rates, our ability to raise additional funds, as well as the amount of expenditures for our clinical development of vidutolimod and ongoing business operations
Income Taxes
There were no provisions for income taxes for the years ended
Results of operations
Comparison of the years ended
The following table summarizes our sources and uses of cash for each of the
periods presented:
Year ended Increase
December 31,
2021 2020 (Decrease)
(in thousands)
Operating expenses:
Research and development $ 45,819 $ 26,719 $ 19,100
General and administrative 15,651 10,185 5,466
Total operating expenses 61,470 36,904 24,566
Loss from operations (61,470 ) (36,904 ) 24,566
Interest income 100 79 21
Loss on sale of
available-for-sale
investments (35 ) - 35
Change in fair value of convertible notes - (83 ) (83 )
Total other income (expense) 65 (4 ) 69
Net loss $ (61,405 ) $ (36,908 ) $ 24,497 Research and Development Expenses
Research and development expenses were
General and Administrative Expenses
General and administrative expenses were
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Other income (expense), net
Other income, net in 2021 included interest income of$0.1 million , which was partially offset by losses on sale of available-for-sale investments of$35,000 .
Other expense, net in 2020 included
Liquidity and capital resources
Overview
We have funded our operations to date primarily with proceeds from the sale of
preferred stock, convertible debt and common stock. Since inception and through
In
OnSeptember 7, 2021 , we filed a shelf registration statement on Form S-3 (File No. 333-259353), which was declared effective by theSEC onSeptember 15, 2021 (the "Shelf Registration Statement"). Under the Shelf Registration Statement, we may offer and sell, from time to time, various securities in an aggregate amount of up to$150 million . In connection with filing the Registration Statement, we entered into an Open Market Sale Agreement SM (the "2021 Sales Agreement"), withJefferies LLC ("Jefferies"), pursuant to which we may offer and sell, from time to time, shares of our common stock having an aggregate offering of up to$50.0 million through Jefferies as our sales agent. As ofDecember 31, 2021 , no shares of common stock have been sold and no net proceeds have been received by us pursuant to the 2021 Sales Agreement. As of the date of this Annual Report on Form 10-K, we have not generated any product sales. We do not know when, or if, we will generate revenue from product sales. We will not generate significant revenue from product sales unless and until we obtain regulatory approval and commercialize one of our current or future product candidates. Our primary uses of capital are, and we expect will continue to be, compensation and related expenses, third-party clinical and contract manufacturing costs, legal and other regulatory expenses, and general overhead costs. We expect that we will continue to generate losses for the foreseeable future, and we expect the losses to increase as we continue the development of, and seek regulatory approvals for, our product candidates, and begin to commercialize any approved products. We are subject to risks in the development of our products, and we may encounter unforeseen expenses, difficulties,complications, delays and other unknown factors that may adversely affect our business. We expect that we will need substantial additional funding to support our continuing operations.
As of
If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we are unable to raise capital when needed or on acceptable terms, we could be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.
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We believe that our existing cash, cash equivalents, and investments of
Cash Flows
The following table summarizes our sources and uses of cash for each of the
periods presented:
Year ended December 31, Increase
2021 2020 (Decrease)
( in thousands)
Net cash used in operating activities
61,189 (83,290 ) 144,479
Net cash provided by financing activities 146 160,271 (160,124 )
Net increase in cash, cash equivalents and
restricted cash $ 7,620 $ 38,870 $ (31,250 )
Operating Activities
During 2021, net cash used in operating activities was
During 2020, net cash used in operating activities was
Investing Activities Net cash provided by investing activities of$61.2 million in 2021 reflects purchase and sales of the Company's available-for-sale investments of$62.0 million to fund current and future operating activities, partially offset by purchases of machinery and equipment of$0.8 million .
Net cash used in investing activities of
Financing Activities
Net cash provided by financing activities in 2021 was
Net cash provided by financing activities in 2020 was
Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing activities, particularly as we advance the preclinical activities and clinical trials for vidutolimod and any other product candidates that we
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may develop or acquire in the future. In addition, we have incurred, and expect to incur, additional costs associated with operating as a public company, including significant legal, accounting, investor relations and other expenses that we did not incur as a private company. The timing and amount of our operating expenditures will depend largely on:
• the extent to which we experience delays or interruptions to preclinical
studies and clinical trials, to our third-party service providers on whom
we rely, or to our supply chain due to the ongoing
COVID-19
pandemic or otherwise;
• the initiation, progress, timing, costs and results of current and future
preclinical studies and clinical trials for vidutolimod and any other
product candidates we may develop or acquire in the future;
• the cost and timing of the manufacture of additional clinical trial
materials and the completion of commercial-scale outsourced manufacturing
activities;
• the costs and timing to seek and obtain regulatory approvals for any
product candidates that successfully complete clinical trials;
• the need to hire additional clinical, quality assurance, quality control
and other scientificpersonnel;
• the number and characteristics of product candidates that we develop or may
in-license;
• the outcome, timing and cost of meeting and maintaining compliance with
regulatory requirements established by the U.S. Food and Drug
Administration (the "FDA"), the European Medical Agency (the "EMA") and
other comparable foreign regulatory authorities;
• the cost of filing, prosecuting, defending and enforcing our patent
claims and other intellectual property rights;
• the terms of any collaboration agreements we may choose to enter into;
• the cost associated with the expansion of our operational, financial and
management systems and increased personnel, including personnel to
support our operations as a public company; and
• the cost of establishing sales, marketing and distribution capabilities
for any product candidates for which we may receive regulatory approval
in regions where we choose to commercialize our products, if approved, on
our own.
Until such time, if ever, as we can generate substantial product revenue, we expect to finance our operations through a combination of equity offerings, debt financings, collaborations, strategic alliances and marketing, distribution or licensing arrangements. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, ownership interests may be materially diluted, and the terms of such securities could include liquidation or other preferences that adversely affect your rights as a common stockholder. Debt financing and preferred equity financing, if available, may involve agreements that include restrictive covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. In addition, debt financing would result in fixed payment obligations. If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings or other arrangements when needed, we may be required to delay, limit, reduce or terminate our research, product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Contractual obligations and other commitments
We enter into contracts in the normal course of business with CROs, CMOs and other third parties for clinical trials, preclinical research studies and testing and manufacturing services. These contracts are cancelable
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by us upon prior written notice. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including noncancelable obligations of our service providers, up to the date of cancellation. The amount and timing of such payments are not known.
We have also entered into license and collaboration agreements with third parties, which are in the normal course of business. We have not included future payments under these agreements since obligations under these agreements are contingent upon future events such as our achievement of specified development, regulatory, and commercial milestones, or royalties on net product sales.
Pursuant to the Kuros License Agreement, we are required to make payments to Kuros for each product that achieves certain development and regulatory milestones. We may be obligated to make up to$56.0 million in milestone payments to Kuros related to vidutolimod. We are also required to pay royalties on sales of future products, if any. ThroughDecember 31, 2021 , the Company has incurred license fees and milestone payments totaling$8.3 million , including$6.0 million in 2021. Cost incurred in 2021 relate to: (i) a$2.0 million milestone payment in connection with the dosing of the first patient in the Phase 2/3 first-line melanoma trial for vidutolimod and (ii) a$4.0 million milestone payment in connection with the dosing of a first patient in a Phase 2 trial of vidutolimod in combination with nivolumab for the treatment of patients with anti-PD-1 refractory melanoma and to potentially support a Biologics License Application ("BLA") and marketing approval of vidutolimod. Future milestone payments will be due upon filing for regulatory approval in each ofthe United States ,Europe and the Far East and for ultimate approval in each of those regions. We do not currently have any long-term leases. We rent our office space inCambridge, Massachusetts based on a month-to-month license agreement with the landlord.
Critical accounting policies and significant judgments and estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, costs and expenses. We base our estimates on historical experience, known trends and events and various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to our consolidated financial statements, we believe that the following accounting policies are the most critical to the judgement and estimates used in the preparation of our consolidated financial statements.
As part of the process of preparing our consolidated financial statements, we
are required to estimate our accrued research and development expenses. This
process involves reviewing open contracts, communicating with our applicable
personnel to identify services that have been performed on our behalf and
estimating the level of service performed and the associated cost incurred for
the service when we have not yet been invoiced or otherwise notified of actual
costs. The majority of our service providers invoice us in arrears for services
performed, on a
pre-determined
schedule or when contractual milestones are met; however, some require advance
payments. We make estimates of our accrued expenses as of each balance sheet
date in the consolidated financial statements based on facts and circumstances
known to us at that time. We periodically confirm the accuracy of the estimates
with the service providers and make adjustments if necessary. Examples of
estimated accrued research and development expenses include fees paid to:
• CROs in connection with preclinical and clinical trials;
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• CMOs and other providers in connection with the production of preclinical
and clinical trial materials;
• investigative sites in connection with clinical trials; and
• other vendors in connection with our preclinical development activities.
We base our expenses related to preclinical studies and clinical trials on our estimates of the services received and efforts expended pursuant to quotes and contracts with multiple research institutions and CROs that conduct and manage preclinical studies and clinical trials on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust the accrual or prepaid expense accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, the estimated status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period.
Stock-Based Compensation
We measure all stock-based awards granted based on their estimated fair value on the date of the grant and recognize the corresponding compensation expense for those awarded to employees and directors over the requisite service period, which is generally the vesting period of the respective award, and for those awarded to nonemployees over the period during which services are rendered by nonemployees until completed. We have typically issued stock options and restricted stock awards with service-based vesting conditions and we record the expense for these awards using the straight-line method.
We estimate the fair value of each stock option grant using the Black-Scholes option-pricing model, which uses assumptions we make for the volatility of our common stock, the expected term of our stock options, the risk-free interest rate for a period that approximates the expected term of our stock options and our expected dividend yield.
The fair value of our common stock is also an input used to determine the fair value of stock options. Prior to the IPO, the estimated fair value of our common stock had been determined by our board of directors as of the date of each award, with input from management, considering our most recently available third-party valuations of common stock and our board of directors' assessment of additional objective and subjective factors that it believed were relevant and which may have changed from the date of the most recent valuation through the date of the grant, which intended all options granted to be exercisable at price per share not less than the per share fair value of our common stock underlying those options on the grant date. Subsequent to the IPO, the fair value of our common stock is the closing selling price per share of our common stock as reported on the Nasdaq Global Market on the date of grant or other relevant determination date.
Recent accounting pronouncements
A description of recently issued and recently adopted accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Emerging Growth Company and Smaller Reporting Company Status
The Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), permits an "emerging growth company" such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private
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companies. We have elected to not "opt out" of this provision and, as a result, we will adopt new or revised accounting standards at the time private companies adopt the new or revised accounting standard and will do so until such time that we either (i) irrevocably elect to "opt out" of such extended transition period or (ii) no longer qualify as an emerging growth company. Other exemptions and reduced reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years of audited consolidated financial statements in a registration statement for an initial public offering, an exemption from the requirement to provide an auditor's report on internal controls over financial reporting pursuant to the Sarbanes-Oxley Act of 2012, an exemption from any requirement that may be adopted by thePublic Company Accounting Oversight Board regarding mandatory audit firm rotation, and less extensive disclosure about our executive compensation arrangements. We would cease to be an emerging growth company upon the earliest of: (1) the last day of the fiscal year ending after the fifth anniversary of our initial public offering; (2) the last day of the fiscal year in which we have more than$1.07 billion in annual revenue; (3) the last day of the fiscal year in which we qualify as a "large accelerated filer," with at least$700.0 million of equity securities held by non-affiliates as of the priorJune 30th ; or (4) the issuance, in any three-year period, by our company of more than$1.0 billion in non-convertible debt securities held by non-affiliates. We are also a "smaller reporting company" and we may take advantage of certain of the scaled disclosures available to smaller reporting companies until the fiscal year following the determination that (i) the market value of our stock held by non-affiliates is more than$250 million or (ii) our annual revenue was more than$100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is more than$700 million measured on the last business day of our second fiscal quarter. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited consolidated financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
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